China's Stock Market Continues Its Collapse...Economy To Follow?

China’s Shanghai market dropped another 5% today and is now down 62% from its peak. To put that in context, a similar drop in the US market would take the DOW to about 5,500.

Of more concern to the US and global economy than the stock market is what it means for China’s economy. The market is not a perfect forecaster–recall the famous quip about how the US market has forecast nine of the last five recessions–but it’s hard to see how a fall of this magnitude will not be followed by a major slowdown in the economy.

Bulls argue that the Shanghai market was a bubble and that the market is only now hitting rational levels. The same can be said for the NASDAQ in 2000. The collapse of technology spending that followed, however, was real.

For now, analysts are merely forecasting a slowdown in China’s GDP growth, from 11% to 8% or so. We’ll believe that when we see it. Economies don’t usually behave this way, and we can’t imagine that China has yet figured out how to do away with the business cycle.

A sharp slowdown in China will affect the US in several ways, with the most important being reduced demand from the world’s 4th largest economy.